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denying a motion to dismiss entrenchment claims, explaining that the requisite reasonableness inquiry "will of course quite often be ill-suited to pre-trial resolution since the question of reasonableness is necessarily highly contextual"
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Civil Action No. 14696, Consolidated Civil Action No. 14623.
Date Submitted: January 10, 1996.
Date Decided: January 18, 1996.
Jesse A. Finkelstein, Esquire and Todd C. Schiltz, Esquire, of RICHARDS, LAYTON FINGER, Wilmington, Delaware; OF COUNSEL: CRAVATH, SWAINE MOORE, New York, New York; Attorneys for Plaintiff.
Joseph A. Rosenthal, Esquire, of ROSENTHAL, MONHAIT, GROSS GODDESS, P.A., Wilmington, Delaware; Pamela S. Tikellis, Esquire, James C. Strum, Esquire and Robert J. Kriner, Jr., Esquire, of CHIMICLES, JACOBSEN TIKELLIS, Wilmington, Delaware; OF COUNSEL: Joshua N. Rubin, Esquire, of ABBEY ELLIS, New York, New York; Jonathan M. Plasse, Esquire, of GOODKIND LABATON RUDOFF SUCHAROW LLP, New York, New York; BERNSTEIN LIEBHARD LIFSHITZ, New York, New York; FARUQI FARUQI, New York, New York; Charles Piven, Esquire, Baltimore, Maryland; Robert C. Susser, P.C., New York, New York; WECHSLER HARWOOD HALEBIAN FEFFER, LLP, New York, New York; Attorneys for Shareholder Plaintiffs.
Steven J. Rothschild, Esquire, Karen L. Valihura, Esquire and Robert S. Saunders, Esquire, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, Wilmington, Delaware; Attorneys for First Interstate Bancorp, William E.B. Siart, William F. Randall and Edward M. Carson.
Michael D. Goldman, Esquire, Stephen C. Norman, Esquire and Jennifer Gimler Brady, Esquire, of POTTER ANDERSON CORROON, Wilmington, Delaware; OF COUNSEL: Edwin B. Mishkin, Esquire and Richard Ziegler, Esquire, of CLEARY GOTTLIEB STEEN HAMILTON, New York, New York; Attorneys for First Bank System, Inc. and Eleven Acquisition Corporation.
A. Gilchrist Sparks, III, Esquire, Kenneth J. Nachbar, Esquire and Jon E. Abramczyk, Esquire, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; OF COUNSEL: Richard H. Borow, Esquire, Kenneth R. Heitz, Esquire, David Siegel, Esquire and Joseph M. Lipner, Esquire, of IRELL MANELLA, Los Angeles, California; Attorneys for John E. Bryson, Jewel Plummer Cobb, Ralph P. Davidson, Myron du Bain, Don C. Frisbee, George M. Keller, Thomas L. Lee, William F. Miller, Steven B. Sample, Forrest N. Shumway, Richard J. Stegemeier and Daniel M. Tellep.
MEMORANDUM OPINION
On November 13, 1995, Wells Fargo Company, a corporation registered under the Bank Holding Company Act of 1956 that is currently seeking to acquire First Interstate Bancorp, which is also a registered bank holding company, filed this action against First Interstate, the members of its board of directors and others. The suit seeks declaratory and injunctive relief with respect to measures allegedly taken by First Interstate in response to proposals made by Wells Fargo to acquire First Interstate. Most pertinently, it is alleged that the directors of First Interstate breached their fiduciary duties by responding to Wells Fargo's proposal by entering into a merger agreement with First Bank System, Inc. at a lower value than Wells Fargo's proposal offered; by thereafter failing to redeem a defensive stock rights plan ("poison pill"), which redemption would arguably allow shareholders more directly to choose between the two offers; and by granting First Bank contractual rights to a break-up fee and a stock option designed, it is said, impermissibly to impede the possible success of any competing proposal.
Wells Fargo purports to bring this action both in its capacity as the owner of one hundred shares of First Interstate common stock and as a person interested in entering into an acquisition transaction with the First Interstate shareholders directly or with the company itself. Five additional shareholders apparently unrelated to Wells Fargo also filed class action complaints against First Interstate and its board of directors. These actions were consolidated with Wells Fargo's actions. In this memorandum opinion I refer to the most recent complaints in all of these actions as the relevant complaints.
First Bank is named as a defendant on the theory that it has knowingly participated in and aided the alleged breach of duty by the First Interstate board. In that connection it is alleged that following the signing of the First Bank merger agreement First Bank materially increased its program of buying its own stock on the open market; that was done to keep the price of the its stock high in order to make the deal look better to First Interstate shareholders; and that Wells Fargo knew about this repurchase program and its purpose. In conclusion it is alleged that, in failing to disclose these facts in its 14D-9 filing, the First Interstate board breached a duty of candor to its shareholders and that First Bank knowingly participated.
The defendants, First Interstate, the members of its board of directors, and First Bank, answered and moved to dismiss all of the respective claims against them, asserting that Wells Fargo had failed to allege facts that constituted a claim upon which relief may be granted. These motions, in this case and in a parallel shareholders representative action, were presented on January 10, 1996. This is the court's opinion denying the motion to dismiss the complaint. In doing so, however, I take the occasion to rule on the legal adequacy of several aspects of the relevant complaints, concluding that certain matters attempting to state claims upon which relief may be granted, fail to do so.
I. Background Facts
Based upon the allegations of the complaints the facts relevant to this motion appear as follows.
1. Wells Fargo's Original Approach:
On October 17, 1995, Wells Fargo delivered a letter to First Interstate describing its interest in undertaking a tax-free merger. The letter outlined a proposal to exchange 0.625 shares of Wells Fargo stock for each share of First Interstate, a 26% premium over the market value of First Interstate common stock at the time. In response, First Interstate's Chairman and CEO, William Siart, announced that he was not satisfied with the offer. Mr. Siart also began discussions with potential alternative merger partners, including First Bank.
On October 26, 1995, Siart met with Wells Fargo's Chairman and CEO, Paul Hazen to discuss a potential merger. Mr. Hazen indicated a willingness to increase the exchange ratio from 0.625 to 0.65. Siart wanted .70 shares, but Hazen was unwilling to offer that. Five days later, the two men met again and Mr. Siart indicated that he would recommend a merger if Wells Fargo increased its proposed exchange ratio to 0.68. No deal was struck and talks broke down after this meeting.
2. The First Bank Merger Agreement:
On November 6, 1995, First Interstate announced it had entered into a merger agreement with First Bank and Eleven Acquisition Corporation, a wholly-owned subsidiary of First Bank, pursuant to which First Interstate would be merged with Eleven Acquisition, with First Interstate surviving the merger. The proposed merger provided for the exchange of 2.6 shares of First Bank stock for each share of First Interstate. Based on the most recent closing prices at the time, First Bank's exchange ratio represented a price of $132.28 per share while Wells Fargo's exchange ratio of 0.65 represented $137.96 per share at current market prices. In connection with signing the merger agreement, First Interstate also amended its shareholder rights plan to render it inapplicable to the proposed First Bank merger. There are approximately 76 million shares of First Interstate stock outstanding, making the value of the proposed First Bank acquisition approximately $10 billion.
The merger agreement provided for reciprocal break-up fees, reciprocal stock options, and the resolution of certain governance issues. With respect to the break-up fees, each party agreed to pay the other party up to $100 million if certain triggering events occur before or after termination of the merger agreement. Each party also agreed to grant the other an option to purchase shares, exercisable upon the acquisition by any third party of beneficial ownership of 20% or more of the outstanding common stock of the issuer of the option. In the case of First Interstate, the option it granted covered approximately 15 million shares, which if exercised would constitute 18% of the company's outstanding stock. The exercise price was $127.75. While the complaints do not say what the market price of the First Interstate stock was prior to the execution of the merger agreement, it does allege that the value of the deal proposed at that time was $132.28 per share. The options are capped so that the total profit received by the holder may not exceed $100 million. Thus, it could potentially cost First Interstate up to $200 million to back out of the proposed merger with First Bank, a cost representing approximately 2% of the transaction value. The merger agreement contained a fiduciary out provision.
Finally, First Interstate and First Bank agreed that after the acquisition the surviving entity would retain the First Interstate name, that ten of First Interstate's fifteen directors would sit on the board of the holding company, and that Mr. Siart would be President and Chief Operating Officer of the holding company.
The day after this merger proposal was announced, First Bank allegedly commenced a series of repurchases of its own stock. Although First Bank had a pre-existing repurchase program in place, it is alleged that the repurchases initiated at this time were of a much greater magnitude than previously.
3. Wells Fargo's Exchange Offer:
Thwarted in its attempts to negotiate a friendly acquisition, Wells Fargo announced on November 13, 1995, its intention to commence an exchange offer for all First Interstate shares. Under the terms of this still to be forthcoming offer, Wells Fargo will offer to exchange two-thirds of a share of Wells Fargo common stock for each share of First Interstate common stock. Based on the closing price of Wells Fargo stock on the last day of trading prior to this announcement, the market value of the offer was $143.58 per share of First Interstate common stock. Impeding the closing of such an exchange offer by Wells Fargo is a shareholder rights plan adopted as a general planning matter by the First Interstate board in 1988. The rights plan allegedly precludes Wells Fargo from going forward with its exchange offer unless First Interstate's board redeems or amends the rights plan.
On this same date, Wells Fargo also announced its intention to solicit First Interstate stockholders for (1) proxies to vote against approval of the merger between First Interstate and First Bank and, if necessary, (2) written consents to remove the First Interstate Board and replace it with nominees of Wells Fargo who are committed to removing impediments to a merger with Wells Fargo.
On November 20, 1995, following Wells Fargo's announcement of its exchange offer, First Interstate filed a Schedule 14D-9 with the Securities Exchange Commission in which it declined to recommend the Wells Fargo exchange offer and stated its support for the proposed merger with First Bank. That filing listed sixteen factors that First Interstate considered material in preferring the proposed First Bank merger over a transaction with Wells Fargo.
II. Wells Fargo's Claims
Wells Fargo asserts four types of claims for injunctive and/or declaratory relief against First Interstate and its directors. In addition to claims against First Interstate, Wells Fargo seeks injunctive and declaratory relief against First Bank for aiding and abetting breaches of fiduciary duty on the part of the First Interstate directors.
At the time the parties briefed this motion to dismiss, Wells Fargo voluntarily abandoned four counts of its amended complaint.
Briefly the four types of claims against First Interstate are as follows: First, Wells Fargo claims that First Interstate's board has breached its fiduciary duties by knowingly choosing a merger that provides less financial benefit to the company's shareholders than the proposal that it offers. Second, Wells Fargo asserts that First Interstate's board has entered into the First Bank merger agreement as a defense to its proposal; as such it claims that judicial review of that merger must satisfy what has been called the enhanced business judgment rule announced in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), which according to Wells Fargo it cannot do. Third, Wells Fargo asserts that First Interstate has breached a fiduciary duty of candor by failing to disclose in its 14D-9 filing the alleged fact that First Bank has bought its own stock on the market in order to artificially keep the price up.Fourth, Wells Fargo asserts that its proposed transaction, if closed, would not be subject to the provisions of Section 203 of the Delaware Corporation Law, which if it applies would restrict the ability to effectuate a merger between Wells Fargo and First Interstate. Wells Fargo seeks a declaratory judgment confirming that position. In addition, Wells Fargo asserts that its intended exchange offer, proxy solicitation, and consent solicitation would not constitute tortious interference with the First Bank/First Interstate merger and requests a declaratory judgment to that effect.
With respect to its claims against First Bank, Wells Fargo alleges that First Bank had knowledge of the purported breaches of fiduciary duties by First Interstate and its directors and assisted in such breaches by repurchasing large blocks of its own stock immediately after the proposed First Bank merger was announced and by failing to disclose that fact (effectively helping to conceal the purported breaches).
For the reasons that follow I conclude that, at the least, the relevant complaints state a claim for relief when they assert that the refusal to redeem First Interstate's stock rights plan is a step that, in the circumstances, must, but cannot, satisfy the judicial review standard of Unocal. I further conclude that, assuming that such a claim is a derivative claim, it nevertheless is not one that requires a pre-suit demand upon the First Interstate board before a shareholder may properly maintain the action against the board. So concluding, I must find that the relevant complaints may not be dismissed at this stage. In order to manage the trial of the case more effectively, however, I further address other aspects of the relevant complaints in order to trim from the trial matters that present questions of law, assuming the facts alleged to be true.
III. " Revlon Claims"
Defendants characterize the loyalty claims said to arise from the board's decision to seek out and accept First Bank's proposal as a "Revlon" claim. They assert moreover that the recent case of In re Santa Fe Pacific Corp Shareholder Litigation, Del.Supr. No. 224, Veasey, C.J. (1995), makes it clear that no "Revlon duties" arise in the circumstances of this stock for stock merger. That is, in this instance the closing of the merger will not effect a removal of corporate control from the public market. Therefore they assert that under that case, Paramount Communications v. QVC Network, Del.Supr., 637 A.2d 34 (1993), and others, there are no special "Revlon" duties of any sort present here. In using this difficult phrase I mean, as recent cases teach, a duty for the board to strive in good faith to achieve a transaction that offers the highest present value reasonably available, including the duty to talk to all responsible buyers.
What I take to be distinctive about this state of affairs [when "Revlon" duties apply] is three things principally.First, in this situation the board must seek to achieve greatest available current value; it may not, in effect, trade achievable current value for a prospect of greater future value, as it may normally do in the exercise of its good faith business judgment. Historically, one would say that courts would be slow to impose this limitation except in limited circumstances. See Robinson v. Pittsburgh Oil Refining Corp., Del.Ch., 126 A.2d 46 (1924). And indeed despite the fact that commentators tended to treat the Revlon case as revolutionary, recent cases have made clear that it did not deviate from this tradition very greatly.Second, when in this situation, a board's duty to be informed will require it to fully consider alternative transactions offered by any responsible buyer. Third, in part "Revlon duties" are not distinctive board duties at all, but a changed standard of judicial review. That is when "Revlon duties" are triggered a burden will shift to the directors and the court will undertake more active review of the traditional directorial duties of care and loyalty under a reasonableness standard. Paramount Communications v. QVC Network, Del.Supr., 637 A.2d 34 (1993).
Defendants are certainly correct that under the teaching of QVC and Santa Fe the special considerations present when Revlon duties are triggered are not present in this case, in which no change in corporate control is implicated. The fact that, as alleged, the First Interstate board talked to a number of other possible transaction-partners does not itself constrain the usual scope of board authority and does not invoke the special duties referred to in footnote 3. Thus the special considerations of the Revlon case will have no bearing on the relief sought in the complaints. Specifically that means that this court will have no occasion here to assess the economic value of these competing transactions for the purpose of enforcing a duty to accept the proposal that represents the higher current value.
While I have confidence that no "Revlon" duties exist under the facts alleged, to say that is not, of course, to say that the members of the First Interstate board have no duty, both in turning away from the Wells Fargo opportunity and in securing the First Bank proposed merger, to proceed advisedly in a good faith attempt to advance the corporation's interests and not to foster their own interests at a cost to the corporation. Respecting the duty of loyalty more broadly conceived than the "Revlon duty," I note that the complaint does not allege facts that suggest that the First Bank merger agreement was in any classic sense self-interested (meaning no conflicting ownership or other interests are alleged). Thus, (in the absence of allegations of eccentric facts dealing with strange motivations such as hatred, lust, vengeance or other interesting human weaknesses rarely directly encountered in the quiet residential precincts of corporation law), if the board or some members of it is to be charged with disloyalty it is because those board members are alleged to have a personal interest in the transaction in the indirect sense of an interest in maintaining their seats on the board of First Interstate or otherwise benefiting indirectly from the taking of the First Bank option to the exclusion of the Wells Fargo option. But this sort of loyalty claim — customarily referred to as an entrenchment claim — is treated independently in the complaints and is dealt with in the next section in this memorandum.
IV. Entrenchment Claims
Plaintiffs claim that the First Interstate directors' steps to achieve the First Bank deal and thwart a Wells Fargo deal are "defensive" under Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and not reasonable in relation to any threat that the Wells Fargo proposal presents. With respect to this charge defendants assert two arguments on this motion to dismiss. First, defendants argue that the allegations of the relevant complaints, even if true, show that both aspects of Unocal's enhanced scrutiny have been met here. Thus they claim that the relevant complaints simply fail to state a claim for breach of any duty owed by a director to the corporation or its shareholders. Second, defendants assert that such a claim has not properly been brought in all events; they claim that such a claim is derivative in nature and must comply with Rule 23.1, with respect to pre-suit demand on the board, which has not been done. I put that argument to the side for the moment and turn to the substantive argument first, accepting as true for these purposes the allegations of the relevant complaints.
1. Reasonableness of "Defensive" Acts.
As our Supreme Court has made clear, the enhanced judicial scrutiny contemplated by Unocal applies "whenever the record reflects that a board of directors took defensive measures in response to a `perceived threat to corporate policy and effectiveness which touches upon issues of control.'" Unitrin, Inc. v. American Gen. Corp., Del.Supr, 651 A.2d 1361, 1372 n. 9 (1995); Stroud v. Grace, Del.Supr., 606 A.2d 75, 82 (1992); and Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131, 1144 (1990). The corporate control referred to in this context is apparently a different concept than the change in corporate control that triggers "Revlon" duties, as the holding in the recent Santa Fe case seems to demonstrate.
Most notably the complaints charge that (1) the refusal of the board to redeem the First Interstate's stock rights plan is an act (a conscious refusal to act) that is defensive in the relevant sense and that (2) the First Bank merger agreement itself is defensive in this sense. For purposes of this motion to dismiss, I accept that both of these steps may be defensive acts that will trigger the Unocal form of judicial review. That means that upon proof of facts from which a fact finder could conclude that either or both of these acts were defensive, the burden will shift to the director defendants to satisfy, by a preponderance of the evidence, the two-part test of "enhanced business judgment" review that Unocal articulates. The second, more innovative prong of this test asks whether the action taken was reasonable in relation to a threat. Such an inquiry will of course quite often be ill-suited to pre-trial resolution since the question of reasonableness is necessarily highly contextual.
The defendants claim that, even if taken as true, the allegations of Wells Fargo's amended complaint show that the defendants met both parts of the Unocal inquiry. That is, the allegations themselves establish that (1) "the board of directors had reasonable grounds for believing that a danger to corporate policy and effectiveness existed" and (2) "the board of directors' defensive response was reasonable in relation to the threat posed." See Unitrin, 651 A.2d at 1373. For instance, the defendants argue that a showing of "good faith and reasonable investigation" satisfies the first prong of the Unocal analysis, see Unocal 493 A.2d at 955, and that the facts as alleged — namely that the decision was made by a majority of outside directors with advice of legal and financial advisors — "constitute a prima facie showing of good faith and reasonable investigation." See Polk v. Good, Del.Supr., 507 A.2d 531, 537 (1986). In addition, the defendants suggest that there are no allegations in the amended complaint from which it could reasonably be inferred that the break-up fees, stock options, and rights plan are coercive or preclusive, or outside a range of reasonableness. One might well be tempted to agree with the defendants with respect to the break-up fees and stock option provisions of the merger agreement; the effect of the rights plan, however, plainly is a different order of magnitude.
In all events, whether there were reasonable grounds for concluding that a threat was posed and whether the response was proportional to that threat are generally questions of fact to be decided at trial, not on the pleadings. See In re Santa Fe Pacific Corp. Shareholder Litig., Del.Supr., No. 224, 1995 slip op. at 32, Veasey, C.J. (Nov. 22, 1995) ("[Unocal] scrutiny will usually not be satisfied by resting on a defense motion merely attacking the pleadings."). Contrary to the defendants' arguments, I find that a conclusion as to these issues cannot be made simply by examining to the well-pleaded allegations of Wells Fargo's complaint.
2. Is an Entrenchment Claim Derivative or Direct?
Secondly, defendants argue that Wells Fargo and the shareholder plaintiffs lack standing to bring claims of entrenchment because these are derivative claims concerning which neither Wells Fargo nor the shareholder plaintiffs has made demand upon the board. See Del.Ct.Ch.R. 23.1. They are derivative claims, according to the defendants, because neither Wells Fargo nor the shareholder plaintiffs have or will suffer special injury in their capacity as stockholders.
The characterization of corporate law claims as derivative or direct has potentially significant consequences under substantive and procedural law. The rules and principles by which this distinction is drawn are, however, quite imperfect. The broad outline of what makes a claim corporate is simple enough: if the suit seeks recovery for an injury done to the corporation, it is certainly corporate. If it seeks a remedy to compensate for the invasion of a property right of a stockholder, the recovery will be for the stockholder. But in a number of contexts, especially where equitable relief is sought, the distinctions grow quite unclear: consider for example an action claiming that directors sold a block of new stock to a chum at a bargain price in order to protect their incumbency? The suit seeks cancellation. Surely the corporation itself is injured by the sale of stock at a price less than good faith effort would have raised. But just as clearly the individual shareholders have suffered a direct injury in the unfair dilution of their voting power. Equally problematic is the conceptualization of alleged wrongs in connection with a stock for stock merger. The merger is a corporate act, but in the merger the stock (property interest) of all of the shareholders of at least one of the constituent corporations will be fundamentally altered. Consider specifically a reverse triangular merger in which the business of the target company continues to be operated in the same corporate form but its former shareholder now owns stock in its parent. While, of course, a whole range of corporate structure or governance alterations might be effectuated in that connection as well, it is possible that the only practical effect of the merger is the conversion of the property interest of the shareholders of the target corporation. If the merger were accomplished through a breach of duty, does it not seem plausible that the injury is direct not derivative?
Perhaps the best way to view these kinds of cases is to consider the remedy that may be appropriate. Where the remedy in a shareholder action will necessarily affect all shareholders (such as the rescission of a merger) not only is such a case permissible as a class claim (Rule 23(b)(1)) but, speaking prudentially, protection of all interests require that it be litigated once, for all (Rule 23.1). A derivative characterization accomplishes that result.
The decided cases reflect the difficulty of this distinction. As set forth in Moran v. Household Int'l, to state an individual action, a plaintiff "must allege either `an injury which is separate and distinct from that suffered by other shareholders,' . . . or a wrong involving a contractual right of a shareholder . . . which exists independently of any right of the corporation." See Moran v. Household Int'l, Inc., Del.Ch., 490 A.2d 1059, 1070 (quoting 12B Fletcher Cyclopedia Corps. § 5921, at 452 (Perm. Ed. 1984)). Later the Supreme Court of Delaware recognized that Moran does not establish the only test for determining whether a claim is individual or derivative in nature. Lipton v. News Int'l, PLC, Del.Supr., 514 A.2d 1075, 1078 (1986). "Rather, . . . we must look ultimately to whether the plaintiff has alleged `special' injury, in whatever form." Id. The Delaware Supreme Court has noted that "[t]he line between derivative and individual actions can become particularly vague in the area of suits challenging defensive takeover tactics." Kramer v. Western Pacific Indus., Del.Supr., 546 A.2d 348, 352 n. 3 (1988).
In my opinion it is unnecessary to attempt to characterize the claims of breach of duty that remain for trial. The principal claims I find in these complaints are the entrenchment/ Unocal claim treated above and the disclosure claim noted below. With respect to the entrenchment claim, it seems clear that factual allegations which, if true, are sufficient to shift the burden to defendants to meet the "enhanced business judgment" test of Unocal are similarly sufficient to raise a reasonable doubt concerning the board's ability to make a binding business judgment, whether one focuses on a judgment to resist the Wells Fargo offer or on the hypothetical judgment that this board would make if asked to institute this law suit. Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984). Thus, even if this suit were best characterized as a derivative suit seeking equitable and declaratory relief, I would not grant the pending motion. The relevant complaints do state facts sufficient to excuse demand in this instance and the corporation itself is a party defendant. Thus, the functionally significant elements of a well pleaded derivative suit are satisfied in this instance. With respect to the disclosure claim, such claims are quite obviously individual as they affect the right to vote or the personal right to determine if one will sell or not one's investment.
V. Declaratory Judgment Concerning 8 Del.C. § 203 and Tortious Interference With a Contract
In a tireless attempt to assist its business objective, Wells Fargo's novella length amended complaint contains a number of paragraphs directed speculatively to future states of the world. For example, the complaint alleges that "to the extent First Interstate modifies the First Bank Proposed Merger . . . the defendant directors will have a duty to eliminate the break-up fee, [and] the Lock-Up Stock Option . . . in order to avoid . . . breaching their fiduciary duties." First Amd. Cplt. Pars. 34, 65-68. Or: "First Interstate's current Board could frustrate the power of any future Board . . . by . . . adding a "Dead Hand" provision. . . . The adoption of any such amendment would violate . . . fiduciary duties [because . . .]. Pars. 43-45, 90, 93. Or: the claim that a nominating bylaw cannot be applied to a consent solicitation, without any allegation that the Company claims that it does apply to consent solicitations. Pars. 46-47, 98-103. The likelihood of these future states of the world in which these requested rulings would have actual pertinence are surely different, but all equally unknown.
Among these claims looking to a future set of facts is a claim seeking a declaratory judgment that, if Wells Fargo were to come to own a majority of First Interstate's stock and sought within three years thereafter to complete a transaction covered by Section 203 of the Delaware General Corporation Law, that Section 203(b)(6) would apply to exempt any such transactions from the remaining provisions of that statute. Defendants seek to have this claim dismissed as unripe. I agree.
Ripeness in the declaratory judgment context always presents a question of judgment. The relevant considerations are set forth in Stroud v. Milliken Enterprises, Inc., Del.Supr., 552 A.2d 476 (1989) and Schick Inc. v. Amalgamated Clothing Textile Union, Del.Ch., 533 A.2d 1235 (1987). Here, I accept that there may be doubt in the minds of Wells Fargo's officers and attorneys as to the scope of the Section 203(b)(6) exemption. Those doubts, however, are the kind that are the ordinary condition of a world of imperfect information. Every commercial transaction may encounter uncertainty as to the scope and meaning of applicable positive law. Lawyers are trained and licensed in order to mitigate such doubts and risks. But the legal system does not undertake to remove all ambiguity from transactions at early stages. Rather, courts await the presentation of actual disputes arising from settled facts. Here, with respect to the meaning of Section 203 as applied to a future Wells Fargo merger or other covered transaction, there is in my judgment no good reason to impose on the other parties and the public the cost of undertaking presently to resolve legal ambiguity that, if it is to present an operational issue, will do so only after a number of contentious issues are resolved in several courts and in other agencies.
Another purported claim concerns Wells Fargo's possible liability to First Bank in the event it prevails in its effort to acquire First Interstate. The claim that it seeks present comfort on would be a claim for tortious interference with a contract. The theory is that, under the law of whatever state is determined to apply, it has a privilege to induce shareholders to seek the proposal that it offers which it says offers to them materially better consideration. It is not alleged that First Bank has asserted that Wells Fargo has interfered with its contracts by actions that create liability.
In my opinion there are not facts alleged to have occurred that would permit the sensible adjudication of any tortious interference case yet. Whether there is tortious interference cannot be determined until the acts that might arguably constitute such interference have occurred and a claim of such interference, direct or implicit, is made. These theories too will not be the subject of evidence at the trial.
VI. Claims of Misdisclosure
In its complaint, Wells Fargo contends that the directors of First Interstate breached a fiduciary duty of candor by failing to disclose material information to the corporation's stockholders with respect to the proposed merger between First Interstate and First Bank. In particular, Wells Fargo claims that these directors failure to disclose material information in a Schedule 14D-9 filing by the company, which filing recommended against tendering into a forthcoming Wells Fargo exchange offer. That filing listed some sixteen factors that reportedly lead the First Interstate board to conclude that the First Bank merger represented a preferred transaction to the Wells Fargo exchange offer. The principal focus of the claimed non-disclosure is the assertion of fact that First Bank had engaged in materially greater purchases of its own stock following the signing of the First Interstate-First Bank merger agreement; that the purpose of those purchases was to support or raise the market price of First Bank's stock; and that First Interstate knew of these material facts.
Both parties assumed there was a state law duty of disclosure under these circumstances. For purposes of this motion, I proceed on that same assumption.
Defendants assert that these allegations fail to state a claim because the alleged nondisclosures are immaterial as a matter of law. More specifically, the defendants surmise that nothing in Wells Fargo's complaint "supports an inference that `suspiciously timed' repurchases of [First Bank] stock in November 1995 will `significantly alter the total mix of information made available' to a First Interstate stockholder voting on the [proposed First Bank merger] several months later." The defendants also argue that disclosure of any alleged improper purpose behind this repurchasing activity would require the board of directors to engage in "self-flagellation" and therefore falls outside any fiduciary duty of disclosure. See, e.g., Margolies v. Pope Talbot, Inc., Del.Ch., C.A. No. 8244, slip op. at 20, Hartnett, V.C. (Dec. 23, 1986); Weingarden Stark v. Meenan Oil Co., Del.Ch., C.A. Nos. 7291 7310, slip op. at 10, Berger V.C. (Jan. 2, 1985).
A question of materiality is difficult to treat as a question of law on a motion to dismiss. In fact, issues of materiality are generally held to be mixed questions of law and fact, but predominantly questions of fact. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976). They are matters that in many instances require a rich factual context to responsibly decide. See Bronson v. Exide Elec. Corp., Del.Supr., C.A. No. 457, 1992, 1994 Del. LEXIS 129, Holland, J. (Apr. 25, 1994) (order) (finding that questions of materiality "generally cannot be resolved on a motion to dismiss, but rather . . . must be determined after the development of an evidentiary record). For this reason, considering only the allegations of the complaint (and specifically not considering questions of timing of disclosure or other information available to the market) I cannot now conclude that the matter allegedly omitted from the Schedule 14D-9 was immaterial as a matter of law. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976); Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 919 (1985).
To the limited extent Wells Fargo claims that First Interstate has a duty to disclose the improper purpose that allegedly motivated First Bank's repurchase activity, I agree with defendants that such disclosure is not required. Directors are not required to "draw legal conclusions implicating [themselves] in a breach of fiduciary duty from surrounding facts and circumstances prior to a formal adjudication of the matter." Stroud v. Grace, Del.Supr., 606 A.2d 75, 84 n. 1 (1992).
VII. Claims of First Bank Aiding Breach
Wells Fargo and the shareholder plaintiffs allege, in the relevant complaints, that First Bank had knowledge of the purported breaches of fiduciary duty by the First Interstate defendants and assisted those breaches by (1) engaging in substantial repurchases of its own stock — inflating the value of that stock and misleading First Interstate shareholders, and (2) agreeing to the break-up fee and lock-up stock option in connection with the First Interstate/First Bank merger agreement. In the alternative, the plaintiffs allege that First Bank aided and abetted First Interstate's breaches by "failing to inform First Interstate about the repurchases and their effect on the First Bank stock or by failing publicly to acknowledge them and their effect on the First Bank stock when First Interstate failed or refused to do so."
As grounds for state law liability for assisting in the knowing breach of fiduciary duty, these allegations seem thin indeed. The question, however, is whether under any state facts that may be proven in support of these allegations First Bank could be guilty of knowing participation in a breach.
As determined above, the relevant complaints state a claim that the First Interstate defendants breached their fiduciary duties by embracing the First Bank transaction and taking "defensive" steps (or failing to take steps in the case of the rights plan) to preclude Wells Fargo from pursuing an alternative deal at this time. The relevant complaints also state a claim for breach of the fiduciary duty of candor in connection with the First Interstate defendants' failure to disclose First Banks' repurchasing activity. In order for plaintiffs to state a claim that First Bank aided and abetted in one of these alleged breaches, they must plead facts from which it could be inferred that First Bank knew these actions or failure to act were a breach of fiduciary duty, and knowing that, cooperated in the course of action by which the First Interstate board sought to accomplish that result. See Weinberger v. Rio Grand Indus., Inc., Del.Ch., 519 A.2d 116, 131 (1986).
I call the "civil conspiracy" claim thin because nothing has been alleged to show that the merger agreement between First Bank and First Interstate was other than an arms' length negotiation. First Bank's alleged affirmative actions taken after the merger agreement was consummated, in the form of its repurchasing activities, have no tendency, standing alone in my view, to show that First Bank was involved in more than arm's length negotiations with First Interstate and self-serving conduct thereafter. Although the effect of these repurchases might have been to support the market price of First Bank stock, such effect was clearly in the self-interest of First Bank and does not, in and of itself, tend to show that First Bank was involved in any conspiracy with First Interstate to embrace a deal for entrenchment purposes.
The question on this point comes down to pleading "knowing" participation, and on the question of pleading knowledge, however, Rules 12(b)(6) and Rule 9(b) are very sympathetic to plaintiffs. We have here more than simply signing a merger agreement, which alone I could not sustain as stating a claim for knowing participation; the additional element — the alleged stock market activity — is however sufficient in my opinion under the liberal pleading rules generally followed to conclude that a valid claim has been stated against First Bank.
Defendants will submit an order implementing the foregoing on notice.